Transcript of a Press Conference on Launch of the November 2010 Fiscal Monitor, by Carlo Cottarelli, Director, Fiscal Affairs Department, IMF

November 4, 2010

Philip Gerson, Senior Advisor, Fiscal Affairs Department;
Manmohan Kumar, Assistant Director, Fiscal Affairs Department; and
Simonetta Nardin, External Relations Department
Washington, D.C.
Thursday, November 4, 2010
Webcast of the press conference Webcast

MS. NARDIN: Good morning, everybody, welcome to the press conference on the launch of the November 2010 edition of the Fiscal Monitor: Fiscal Exit from Strategy to Implementation.

My name is Simonetta Nardin from the External Relations Department. With me, to present the Monitor, are Carlo Cottarelli, Director of the Fiscal Affairs Department, Phil Garrison, and Manmohan Kumar, who are, respectively, Senior Advisor and Assistant Director, also in the Fiscal Affairs Department.

Mr. Cottarelli will present the findings of the Fiscal Monitor first MR. COTTARELLI: Thank you very much, Simonetta.

What I would like to do is to summarize some key elements of our Fiscal Monitor. I would like to start with the fiscal outlook, the fiscal situation in 2010. This is clearly a year of transition, where still some countries are loosening fiscal policy. In this chart you see countries that are loosening in green. But several countries are already reducing the deficit. However, if you take into account cyclical developments, then the share of the green is much stronger. Deficits are declining in several countries, particularly emerging economies, because economic conditions are improving. But, in general, 2010 is still characterized by a supportive style of fiscal policy.

2011 will be different. Only for a handful of countries there will be an increase in the deficit. For 90 percent of the countries, we project a decline in the deficit.

And this holds true also if we look at the figures adjusting for cyclical developments. Again, the tightening dominates in this chart.

In this chart, not all countries are present because we don’t have cyclically adjusted data for everybody. But clearly, the red, the tightening, is dominant.

And the same applies also if we look at the data, aggregating them, taking into account the size of countries. This is the change in the overall balances, fiscal balance, in 2010. And this is the improvement in the fiscal balances in 2011. It is much stronger in 2011—particularly for advanced countries.

Now, if deficits are increasing, however debt ratios will continue to increase in 2011.

In this chart you see on the horizontal axis, the level of the public debt-to-GDP ratio—in 2010and on the vertical axis, the change that we project for 2011.

As you can see, for the majority of advanced countries, the public debt-to-GDP ratio will continue increasing in 2011—and will continue increasing also for those countries where the level of the debt-to-GDP ratio is above the average, which is indeed this quadrant that is highlighted at this moment.

For emerging economies, the situation is a bit different. You see more countries where there will actually be a decline in the debt-to-GDP ratio in 2011—although the number of countries for which there is an increase still is significant. And, again, there are a few countries where the debt ratio will be increasing from a relatively high level.

The question that we should ask, at this point, is how worried we should be about the further rise in debt ratios in advanced countries? As you know we already expressed our view on this in the past: given the starting high level of deficits, and those still weak economic conditions in advanced countries, it would have been impossible to stop the further increase in the debt-to-GDP ratio. Also, for almost all advanced countries, interest rates are still very low, and they can finance this increased debt at low rates.

At the same time, interest rates will not stay low forever. Here, for example, it is interesting to look at how rapidly markets can change their minds about interest rates. This is the credit default swap spreads for some advanced countries as they are now, on November 2nd, just two days ago. And this is the level where they were one year ago. Much lower, particularly for those countries that are now under pressure.

Markets can change their mind quite rapidly. That is why—and this is a key message of the Monitor—it is very that the countries have now in place and start implementing medium-term fiscal adjustment plans.

One key contribution of this Fiscal Monitor is to provide some detailed information on the fiscal adjustment plans that have been published. On this there are good news and bad news. Let’s start with the good news.

First of all, most countries have published plans involving fiscal adjustment

We looked at a sample that includes the G20 and a selected number of countries with large fiscal adjustment needs. Clearly, the majority of countries is projecting a medium-term adjustment—which is, in a way, good news.

Second piece of good news—the pace of the adjustment is about right. The average pace of adjustment for the next three years in the plans that have been published is about 1 percentage point of GDP per year. That’s something that we regard consistent with the continuation of the growth process—as, indeed, as part of the scenario, the growth scenario, that has been published in the World Economic Outlook about a month ago.

Of course, not all countries are adjusting at the same speed. In general, the larger is the requirement need for a country over the longer term, the stronger is actually the planned adjustment.

As you can see in this chart, the planned adjustment over the next three years is plotted on the horizontal axis, against the total required adjustment over the longer term. This is how we calculated the total required adjustment over the longer term: how much the primary balance, adjusted for the cycle, in each country would have to improve over the next 10 years in order to bring down the public debt-to-GDP ratio below—for the majority of countries—60 percent by 2030.

You can see that many countries will be still far away from what is needed in the longer term, after three years. Some of them, of course, are closer. But the countries with the larger required adjustment over the longer run—Japan, Ireland and the United States—at the end of the three-year period, will still have implemented only part of the overall adjustment.

Another important feature of the speed and modalities of adjustment is that the adjustment, for some countries, is front-loaded. For some, it’s evenly paced. And for some, it’s back-loaded.

There are number of countries for which the adjustment is front-loaded, which means that it is mostly focused in the first year with respect to the second and the third year of the medium-term plan. But if we weigh these buckets by the size of GDP, we see that the countries that are back-loading the adjustment are actually the largest countries.

So, on average, the adjustment is not too front-loaded—which I think also is an important and useful feature, taking into account the uncertainties regarding world growth in 2011.

The third piece of good news is that there is sufficient emphasis on expenditure cuts. These are countries—the advanced countries are countries that typically have expenditure-to-GDP ratio, where it is appropriate to act primarily on the spending side. Although there are some exceptions.

Again, in our sample, these are the countries that are implementing an expenditure-based adjustment. These are the countries with mixed adjustment. And only one country—China—has an adjustment that is focused primarily on revenue – for good reasons, because China has a fairly low revenue-to-GDP ratio, even by emerging market standards.

So, where’s the bad news?

First of all, many measures beyond November 2011 still have to be specified. We know the intentions, in terms of revenue trends and spending trends, but we don’t know enough about exactly what are the spending cuts that would be implemented.

Second, there is no clear long-term debt target for many countries. Many countries have not clarified whether the final goal of the strategy is to stabilize the debt-to-GDP ratio at post-crisis level, or to bring it down to where it was in 2007—or even below that. This remains uncertain for many countries.

And, third, there is not much progress on long-term spending trends. And here, I would like to conclude by looking, once again, at some figures for pension spending and health care spending.

This is the projected increase in pension spending for the next 20 years for various countries. The average projected increase is 1 percent. It is not huge, but it still requires major reforms to offset this increase. And these are the countries that are actually implementing pension reform—France and Greece.

The situation is even worse if we look at health care reform. It’s worse for two reasons: first, because the average projected increase in health care spending over the next 20 years is actually larger than for pension—2.6 percent against 1 percent. And it gets even larger for advanced countries.

Second, because if we look at the map of the world, and we look at countries that are envisaging major reforms in the health care system, aimed primarily at reducing public spending—well, the map is empty. There is no country that is doing this.

Quite a lot remains to be done, particularly when it comes to controlling the long-term trends in spending for pension and health care.

With this, I would like to conclude this presentation to thank you for your attention.

Questioner: Can you expand upon your concerns about the sovereign debt rollover needs, and what role that might play in determining the short- or medium-term deficit issues?

MR. COTTARELLI: It is clear that we have to distinguish. There are some countries that are under market pressure—I don’t have to list you the names, because you know very well who they are. Clearly, for these countries there is a need for an early tightening of fiscal policy. On the other hand, there are countries for which there are no immediate needs, no immediate difficulties, in financing. For those countries, I think it is still important that there’s still some adjustment in 2011. But it appears that fiscal adjustment does not need to be front-loaded.

Question: Looking at the G20 Toronto commitments, both the halving of the deficit by 2013, and the stabilization or reduction of the debt-to-GDP ratios by 2016—do you—your review of countries’ plans, do you think that they are currently sufficient to meet those goals? Or do you have concerns that they won’t?

MR. COTTARELLI: Yes. In general, the plans that I was referring to, the medium-term plans, actually go beyond in their targets with respect to the Toronto commitment. Obviously, there is the issue of implementation. It’s also true, as we underscore in the Monitor, that some of these plans are based on relatively optimistic growth rate projections.

But, Phil, perhaps you want to add something.

MR. GARRISON: The only thing that I would add to what Carlo said is that many of the plans only go through 2013. And, as you mentioned, the target to stabilize or bring down the debt ratio is a 2016 commitment. So it remains to be seen what the plans will consist of for many countries in the years after 2013.But, in general, what’s been committed to so far seems like a reasonable start towards that goal.

MS. NARDIN: Thank you. We have an online question from Emily Kaiser from Reuters. She asks, “Can you provide more detail on the elevated fiscal risks? What do you see as the most pressing concern?”

MR. COTTARELLI: The issue of the risks is discussed in Chapter 4 of the Fiscal Monitor. And there are, indeed, two types of risk.

One is, obviously, possible rollover risk in some countries. From this point of view, we say that the fact that countries have published medium-term adjustment plans and that implementation is already started for some countries in 2010—for some countries in 2011—is a good development, is something that is reducing the risk in this area.

There is another risk where, however, I may be more concerned, and that is of a more longer-term nature. I think that the risk that, as a result of the adjustment strategies, the debt-to-GDP ratio stabilizes, but stabilizes at a very high level. It’s still a very concrete risk. I don’t think that the plans that have been put forward so far do much to reduce this risk.

Although this will not lead necessarily to rollover problems, the fact of having many advanced countries stabilizing their debt-to-GDP ratio at levels of 100 percent or more is going to be a problem in the longer run. Because it is likely in the longer run to lead to higher real interest rates, lower private sector investment, and lower potential growth.

MS. NARDIN: Thank you.

We have a follow-up question, from Reuters again, on the G20 commitments. ” Japan was excluded from that target. Can you comment on how you see Japan addressing its fiscal needs? And do you see any short- or medium-term concerns there?”

MR. COTTARELLI: Japan is in a situation in which it can finance its deficit easily. So the present concerns are not as those countries that are under pressure at the moment.

But you know very well that the debt-to-GDP ratio in Japan, in gross terms, is by far the largest in the world among advanced countries. And in net terms, is still very high.

The deficit is also high, the primary deficit is high. So it’s clear that Japan is one of the countries where, over the medium- to long-term, the fiscal adjustment will have to be stronger.

In the Monitor, we show that by the end of the forecasting horizon, the debt-to-GDP ratio in Japan will still be rising.

MS. NARDIN: Thank you. We have a question from Reuters in Italy. “What do you think about the tightening of debt surveillance discussed under the framework of the reform of the EU Stability Pact?”

MR. COTTARELLI: There are definitely very important positive elements in the reform of fiscal governance in Europe. The fact that, for example, there is more emphasis on the public debt criterion, and the need to bring down public debt, is very important. The fact that sanctions could be introduced in the preventive arm of the Stability and Growth Pact is also particularly important.

There are also some aspects where—and we have been pretty clear about this in the past, in our comments—we would have expected some additional changes. In particular, we noted in the past that it would be appropriate to give more weight in the decision-makers process to the Commission with respect to the Council. And the reforms that have been introduced go in this direction, but perhaps a bit more could have been done.

MS. NARDIN: Thank you.

This concludes the press conference on the launch of the Fiscal Monitor.


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